Part 1: Preparing to Invest

"Before you think about buying stocks, you ought to have made some basic decisions about the market, about how much you trust corporate America, about whether you need to invest in stocks and what you expect to get out of them, about whether you are a short- or long-term investor, and about how you will react to sudden, unexpected, and severe drops in price. It's best to define your objectives and clarify your attitudes (do I really think stocks are riskier than bonds?) before-hand, because if you are undecided and lack conviction, then you are a potential market victim, who abandons all hope and reason at the worst moment and sells out at a loss. It is personal preparation, as much as knowledge and research, that distinguishes the successful stockpicker from the chronic loser. Ultimately it is not the stock market nor even the companies themselves that determine an investor's fate. It is the investor" (45).

Chapter 1: The Making of a Stockpicker

Main idea: basic background on Peter Lynch.
Additional notes:

Lynch started as a golf caddy.
Undergrad: Boston College, Graduate: Wharton.
Interned at Fidelity, went back full-time in 1969 as a research analyst.
Took over the Fidelity Magellan fund in May 1977 ($18 million in assets).
Stepped down from the fund in 1990 ($14 billion in assets).
Currently a research consultant at Fidelity - and its main face.

Chapter 2: The Wall Street Oxymorons

Main idea: professional investors, apart from a few exceptions, don't have any advantages over individual investors, but often have many disadvantages.
Additional notes:

Invest in what you know - you can identify successful companies and take action immediately, as opposed to professional investors, who can be held back by multiple factors.
Street lag:

"Under the current system, a stock isn't truly attractive until a number of large institutions have recognized its suitability and an equal number of respected Wall Street analysts (the researchers who track the various industries and companies) have put it on the recommended list. With so many people waiting for others to make the first move, it's amazing that anything gets bought" (57).
In other words, no professional is going to buy equity in a company that hasn't proven itself on the Street yet. As an individual, however, you can do it.

Job security:

"Success is one thing, but it's more important not to look bad if you fail. There's an unwritten rule on Wall Street: 'You'll never lose your job losing your client's money in IBM'" (59).
"Fund managers can never relax because the game is played year-round. The wins and losses are reviewed after every third month, by clients and bosses who demand immediate results" (61).
In other words, a fund manager will not take extra risk due to job security - he/she need to answer to both immediate bosses and the shareholders.

Rules and regulations:

"Whenever fund managers do decide to buy something exciting (against all the social and political obstacles), they may be held back by various written rules and regulations" (63).
Rules and regulations are in place to protect against serious risk, but they often cause funds to limit themselves to the "top 90 to 100 companies, out of the 10,000 or so that are publicly traded" (64).

"When you ask a bank to handle your investments, mediocrity is all you're going to get in a majority of cases" (65).
"The stocks I try to buy are the very stocks that traditional fund managers try to overlook. In other words, I continue to think like an amateur as frequently as possible" (65).
Exceptions to mediocre fund managers: John Templeton (pioneer in the global market), Max Heine and Michael Price (value investing), John Neff and Ken Heebner (out-of-favor stocks), Peter deRoetth (small stocks), George Soros and Jimmy Rogers (esoteric positions - shorting gold, buying puts, hedging Australian bonds), Warren Buffett (buys whole companies).

Chapter 3: Is This Gambling, or What?

Main idea: most bonds are just as risky as stocks are, but produce much lower yields; "clearly the stock market has been a gamble worth taking - as long as you know how to play the game" (76).
Additional notes:

"Investing in bonds, money-markets, or CDs are all different forms of investing in debt - for which one is paid interest" (67).
Corporate and municipal bonds are usually callable very soon, so you can't really profit from changes in interest rates.
"Since there's very little in the corporate bond business that isn't callable, you're advised to buy Treasuries if you hope to profit from a fall in interest rates" (68).
Bruce Bent and Harry Browne invented the money-market account, Ned Johnson added the check-writing feature.
"Historically, investing in stocks is undeniably more profitable that investing in debt. In fact, since 1927, common stocks have recorded gains of 9.8% a year on average, as compared to 5 perfect for corporate bonds, 4.4% for government, and 3.4% for Treasury bills.
Add in the long-term inflation rate (~ 3% a year according to Consumer Price Index), and the real return on Treasury bills is basically zero.
Bond risks: rising interest rates leave you with 2 choices - suffer the low yield until bonds mature or sell the bonds at a substantial discount to face value.
Stock risks can be reduced over time with "proper play." You can't just buy blue-chip stocks and expect them to perform well. You need to pay attention.

Chapter 4: Passing the Mirror Test

Main idea: before you invest, you need to consider 3 main things: "(1) Do I own a house? (2) Do I need the money? And (3) Do I have the personal qualities that will bring me success in stocks?" (77)
Additional notes:

Real estate is a great investment:

Leverage: you pay the down payment (~ 20% as opposed to buying stock on margin at 50%) and now control much more.
Perfect hedge against inflation.
Tax benefits: interest on loan payments is tax-deductible, also can roll proceeds from a sale into a new house without paying taxes on profit.
Investors not likely to get scared out of market by headlines and short-term oscillations.
People generally spend a lot of time researching the house before they buy it

Investment requires long-term commitment. "Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future" (80).
You must have the long-term mindset in order to be successful in stocks:

"The trick is not to learn to trust your gut feelings, but rather discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn't changed" (83).
"The true contrarian waits for things to cool down and buys stocks that nobody cares about, and especially those that make Wall Street yawn" (83).

Chapter 5: Is This a Good Market? Please Don't Ask

Main idea: there is no way to predict the market - all we have is past history info; a long-term investor needs to not worry about any "markets" but instead concentrate on finding the right companies to invest in.
Additional notes:

People always try to prepare for what just happened - because there's no way to tell the future with any accurate degree.
Good way for an amateur to read market signs is by using the "cocktail theory." Imagine you're at a cocktail party, and one of the following can occur:

Stage 1: market has been down for a while, just started going up. People don't like to talk about stocks - avoid the subject.
Stage 2: market is up 15% from stage 1, but not many are paying attention. There's a little talk about stocks, but mostly about how risky the stock market is.
Stage 3: market is up 30% from stage 1, there's a crowd of people interested now. Everyone at the party has bought some equity, everyone is asking for advice on which stock to purchase.
Stage 4: everyone now has advice on which stocks to buy. "When the neighbors tell me what to buy and then I wish I had taken their advice, it's a sure sign that the market has reached a top and is due for a tumble" (88).

Again, the cocktail theory doesn't predict the market in any way. The key is not to worry about market ups and downs, but to buy the right companies: "If you had bought stocks in great companies back in 1925 and held on to them through the Crash and the Depression (admittedly this wouldn't have been easy), by 1936 you would have been very pleased at the results" (88).
Warren Buffet: "As far as I'm concerned, the stock market doesn't exist. It is there only as a reference to see if anybody is offering to do anything foolish" (89).
During a certain period when Buffet thought stocks were way overpriced, he sold everything and returned all the money to his partners at a sizable profit - this is, in Lynch's experience, unique in the history of finance.
There can be an overvalued market. "The way you'll know when the market is overvalued is when you can't find a single company that's reasonably priced or that meets your other criteria for investment. The reason Buffet returned his partners' money was that he said he couldn't find any stocks worth owning. He'd looked over hundreds of individual companies and found not one he'd buy on the fundamental merits" (90).

Section Summary - key points

Don't overestimate the skill and wisdom of professionals.
Take advantage of what you already know.
Look for opportunities that haven't yet been discovered and certified by Wall Street - companies that are "off the radar scope." The average person is exposed to interesting local companies and products years before the professionals.
Invest in a house before you invest in a stock.
Invest in companies, not the stock market.
Ignore short-term fluctuations.
Large profits and losses can be made in common stocks.
Predicting the economy and short-term direction of the stock market is futile.
The long-term returns from stocks are both relatively predictable and also far superior to the long-term returns from bonds.
Keeping up with a company in which you own stock is like playing an endless stud-poker hand.
Common stocks aren't for everyone, nor even for all phases of a person's life.

Part 2: Picking Winners

"In this section we'll discuss how to exploit an edge, how to find the most promising investments, how to evaluate what you own and what you can expect to gain in each of six different categories of stocks, the characteristics of a perfect company, the characteristics of companies that should be avoided at all costs, the importance of earnings to the eventual success or failure of any stock, the question to ask in researching a stock, how to monitor a company's progress, how to get the facts, and how to evaluate the important benchmarks, such as cash, debt, price/earning ratios, profit margins, book value, dividends, etc" (93).

Chapter 6: Stalking the Tenbagger

Main idea: invest in what you know; people with an edge (professional or consumer) can find winners a long time before Wall Street notices.
Additional notes:

"So often we struggle to pick a winning stock, when all the while a winning stock has been struggling to pick us" (97). In other words, pay attention to the world around you - this is a good first step to finding companies that may be good to invest in.
Having an edge (professional - working in the company or its industry; consumer - buying a product the company makes) helps you find stocks long before they become popular. "You're looking for a situation where the value of the assets per share exceeds the price per share of the stock" (101).
"The professional's edge is especially helpful in knowing when and when not to buy shares in companies that have been around awhile, especially those in the so-called cyclical industries" (100).
"On top of that, there's the consumer's edge that's helpful in picking out winners from the newer and smaller fast-growing companies, especially in retail trades" (102).
For turnarounds - "…in most other endeavors the grassroots observer can spot a turnaround six to twelve months ahead of the regular financial analysts. This gives an incredible head start in anticipating an improvement in earnings - and earnings, as you'll see, make stock prices go higher" (101).

Chapter 7: I've Got It, I've Got It - What Is It?

Main idea: once you've found a stock, it's time to research it - the first step is to size the company and then classify it to see what potential yield you can expect from the company's growth.
Additional notes:

Research before you invest. This is absolutely crucial. Don't commit on a whim - do your homework.
If you found an amazing product, you need to consider how much of an impact this new product may have on the company's earnings. This depends on how large the company is. Compare the sales of the product itself to the total sales of the company (Buffering aspirin by Bristol-Meyers: 1.5% of total revenue vs. Bayer aspirin by Sterling Drug: 6.5% of total revenue, which can translate to 15% of the company's profit).
First, classify the size of the company. "Specific products aside, big companies don't have big stock moves. In certain markets they perform well, but you'll get your biggest moves in smaller companies" (109). Multi-billion dollar enterprises (such as Chrysler, Burlington Northern, DuPont, Dow Chemical, Procter and Gamble, Coca-Cola) can't grow fast enough to become tenbaggers. "Everything else being equal, you'll do better with the smaller companies" (110).
Next, classify the type of stock. Lynch categorizes companies into six general categories:

The Slow Growers

Large and aging companies, usually expected to grow slightly faster than the gross national product (nation's GNP has averaged about 3% a year).
Started out as fast growers, then slowed down, "either because they had gone as far as they could, or else they got too tired to make the most of their chances. When an industry at large slows down (as they always seem to do), most of the companies within the industry lose momentum as well" (111).
The chart of a slow grower is very flat - slow and steady increase.
"Another sure sign of a slow grower is that it pays a generous and regular dividend" (112).

The Stalwarts

Coca-Cola, Bristol-Meyers, Procter and Gamble, Hershey's, Ralston Purina (dog food), Colgate-Palmolive, the Bell telephone sisters, Kelloggs.
Slightly faster than slow growers, but still not very fast. "When you traffic in stalwarts, you're more or less in the foothills: 10 to 12% annual growth in earnings" (112). Note that this is the growth in earnings, not necessarily yield on the stock growth.
"I always keep some stalwarts in my portfolio because they offer pretty good protection during recessions and hard times" (117).
Stalwarts are good friends in a crisis/recession. They won't go bankrupt, and soon "they will be reassessed and their value will be restored" (118).

The Fast Growers

Small, aggressive new enterprises that grow at 20 to 25% a year.
"A fast-growing company doesn't necessarily have to belong to a fast-growing industry" (118). It may just need room to expand within a slow-growing industry.
There's a lot of risk, especially in younger companies that overzealous and underfinanced - they can easily become bankrupt if a small problem occurs.
Stock in fast growers that turn into slow growers loses value quickly.
"So while the fast growers risk extinction, the larger fast growers risk a rapid devaluation when they begin to falter. Once a fast grower gets too big … there's no space to stretch out" (119).
As long as the fast growers can keep up their performance, they are the big winners in the stock market. "I look for the ones that have good balance sheets and are making substantial profits. The trick is figuring out when they'll stop growing and how much to pay for the growth" (119).

The Cyclicals

Companies whose sales and profits rise and fall in regular (and often predictable) fashion - the business expands and contracts in a cyclical industry.
Autos, airlines, tire companies, steel and aluminum companies, chemical companies.
"Coming out of a recession and into a vigorous economy, the cyclicals flourish, and their stock prices tend to rise much faster than the prices of stalwarts" (120).
Unwary stockpickers can lose money easily in cyclicals, because major cyclicals are large and well-known companies (Ford), and can often be lumped together with the stalwarts.
"Timing is everything in cyclicals, and you have to be able to detect the early signs that business is falling off or picking up" (122).

Turnarounds

Companies that come back after a collapse. Penn Central, Chrysler (was cyclical before).
Turnaround stocks can make up lost ground quickly. "The best thing about investing in successful turnarounds is that of all categories of stocks, their ups and downs are least related to the general market" (122).
Several types of turnarounds:

bail-us-out-or-else: relying on government loans - Chrysler, Lockheed
who-would-have-thunk-it: hard to believe it - Con Edison
little-problem-we-didn't-anticipate: minor tragedy that can create major opportunity - Three Mile Island meltdown (owned by General Public Utilities)
perfectly-good-company-inside-a-bankrupt-company: spin away from its unsuccessful parent - Toys "R" Us inside Interstate Department Stores
restructuring-to-maximize-shareholder-values: Penn Central (restructuring is a company's way to rid itself of unprofitable subsidiaries it should never have acquired in the first place)

The Asset Plays

A company that's sitting on something valuable - that you know about but Wall Street doesn't. "The asset play is where the local edge can be used to greatest advantage" (125).
Asset plays can be in metals and oil, newspapers and TV stations, patented drugs, real estate (Pebble Beach).
Penn Central - ultimate asset play. It had everything: tax-loss carryforward (helped not pay taxes for a while on profits), cash, extensive land holdings in Florida, other land elsewhere, coal in West Virginia, air rights in Manhattan.
"Asset opportunities are everywhere" (127). However, they require a good working knowledge of the company that owns the assets, as well as patience.

Companies can change categories through their lifetime: Disney went through all six. Some can also fall into several categories at once: Penn Central was both a turnaround and an asset play.
It's important to understand the category your stock are in, because various strategies apply to different categories. "Basing a strategy on general maxims, such as 'Sell when you double your money,' 'Sell after two years,' or 'Cut your losses by selling when the price falls ten percent,' is absolute folly. It's simply impossible to find a generic formula that sensibly applies to all different kinds of stocks" (129). For example:

Unless it's a turnaround, don't own a utility and expect it to rise quickly. Utilities are more of slow growers or stalwarts.
Don't treat a young company with large potential like a stalwart - don't sell for 50% gain, because there's a good chance your fast grower will give you 1000% gain.
If a stalwart has doubled in price and the fundamentals look unexciting, don't hold on to it.
Don't hold on to shaky cyclicals through recessions. Value will go down, they could even bankrupt.

Chapter 8: The Perfect Stock, What a Deal!

Main idea: 13 characteristics of a "perfect company" to invest in.
Additional notes:

1: It sounds dull - or, even better, ridiculous:

Boring name - Automatic Data Processing or Bob Evans Farms.
"If you discover an opportunity early enough, you probably get a few dollars off the price just for the dull or odd name" (131).

2: It does something dull:

Doesn't get noticed by major magazines, analysts, etc. - because it's not very interesting.
"A company that does boring things is almost as good as a company that has a boring name, and both together is terrific. Both together is guaranteed to keep the oxymorons [professional investors] away until finall the good news compels them to buy in, thus sending the stock price even higher. If a company with terrific earnings and a strong balance sheet also does dull things, it gives you a lot of time to purchase the stock at a discount. Then when it becomes trendy and overpriced, you can sell your shares to the trend-followers" (132).

3: It does something disagreeable:

Something that makes people shrug, retch, or turn away in disgust.
Safety-Kleen (cleans gas station equipment), Envirodyne (animal casings for sausages, hot dogs).

4: It's a spinoff:

Spinoffs of divisions or parts of companies into separate entities can often result in lucrative investments (Safety-Kleen out of Chicago Rawhide, Toys "R" Us out of Interstate Department Stores).
Spinoffs usually have strong balance sheets and are well-prepared to succeed independently. Once on their own, they can cut costs and improve near-term and long-term earnings.

5: The institutions don't own it, and the analysts don't follow it.
6: The rumors abound: it's involved with toxic waste and/or the mafia.
7: There's something depressing about it:

Funeral homes (Service Corporation International) - depressing, ignored by Wall Street.

8: It's a no-growth industry:

No problems with competition!

9: It's got a niche:

Exclusive franchise in anything - allows you to raise prices.
Drug companies - other companies can't make same drugs, newspapers and TV stations that dominate certain areas, chemical companies - pesticides and herbicides.
Brand names (Tylenol, Coca-Cola, Marlboro) are almost as good as niches - strong public confidence.

10: People have to keep buying it.
11: It's a user of technology:

Invest in a company that benefits from the price war resulting from intense competition.
Instead of investing in Intel or AMD, invest into a company that uses computers/CPUs for cut costs.

12: The insiders are buyers:

"There's no better tip-off to the probable success of a stock than that people in the company are putting their own money into it" (142). "When insiders are buying like crazy, you can be certain that […] the company will not go bankrupt in the next six months" (143).
Another long-term benefit - when management owns stock, rewarding the shareholders becomes first priority, since everyone wants a raise/more money.
Keeping track of insider purchases: every time an officer or director buys or sell shares, he/she must declare it on Form 4 and send it to the SEC.
Insider selling usually means nothing, so it's silly to react to it - many personal reasons to sell. Only one reason to buy, though - insiders think stock is undervalued and will go up.

13: The company is buying back shares:

"When stock is bought in by the company, it is taken out of circulation, therefore shrinking the number of outstanding shares. This can have a magical effect on earnings per share, which in turn has a magical effect on the stock price" (144).
Common alternatives of buying back shares are: raising the dividend, developing new products, starting new operations, making acquisitions. Buying back often works best, since by shrinking shares, you get the maximum impact from the earnings.

Chapter 9: Stocks I'd Avoid

Main idea: various characteristics of certain stocks to avoid.
Additional notes:

Avoid the hottest stocks in the hottest industries - the one with the most publicity.
Beware the "next somethings" - companies touted as the next IBM, the next Intel, the next Disney, etc. - they never are. This is not just with stock - everything - the next Michael Jordan, etc.
Avoid "diworseifications" - poor attempts at diversification through bad acquisitions:

"Instead of buying back shares or raising dividends, profitable companies often prefer to blow money on foolish acquisitions. The dedicated diworseifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding" (153).
"From an investor's point of view, the only two good things about diworseification are owning shares in the company that's being acquired, or in finding turnaround opportunities among the victims of diworseification that have decided to restructure" (154).
The 1960s was the greatest decade for diworseification - many respected companies did this.
Not all acquisitions are foolish. It’s a good strategy when the basic business is terrible. Warren Buffet and his Berkshire Hathaway diversified well. The trick is that you have to know how to make the right acquisitions and manage them successfully.
Diversification that goes well results in "synergy" - 2+2=5 in putting related business together. In other words, boosting business to a great degree rather than detracting from it.
"If a company must acquire something, I'd prefer it to be a related business, but acquisitions in general make me nervous. There's a strong tendency for companies that are flush with cash and feeling powerful to overpay for acquisitions, expect too much from them, and then mismanage them. I'd rather see a vigorous buyback of shares, which is the purest synergy of all" (157).

Avoid "whisper stocks" - fascinating lucrative ideas that someone whispers you about:

"Whisper stocks have a hypnotic effect, and usually the stories have emotional appeal. This is where the sizzle is so delectable that you forget to notice there's no steak" (158).
"What all these longshots had in common besides the fact that you lost money on them was that the great story had no substance. That's the essence of a whisper stock" (159).
These usually have no earnings yet, and no P/E ratio. Lynch suggests - wait for the company to establish a record: "…if the prospects are so phenomenal, then this will be a fine investment next year and the year after that. […] Wait for the earnings" (159).

Beware companies, where the loss of one customer could be catastrophic.
Beware of companies with exciting names: "a flashy name in a mediocre company attracts investors and gives them a false sense of security" (160).

Chapter 10: Earnings, Earnings, Earnings

Main idea: next step is to analyze the company's value on the basis of assets and earnings; you can use the P/E ratio to see whether a company is overvalued compared to the rest of the market or industry sector; it's also good to compare the P/E ratio to the growth rate of the company to see how fast it's expanding compared to how the stock is valued.
Additional notes:

A good practice run is to evaluate yourself as you would a company. Your assets include real estate, cars, furniture, clothes, etc. You subtract all outstanding mortgages, liens, car loans, etc. - your debt. The result is your positive bottom line, or book value, or net economic worth as a tangible asset. Then you can look at your earnings and see what you could be worth in the future.
Earnings are very important. If you look at a stock chart that shows the stock price and the earnings, the two lines run in tandem. If they deviate at some point, they will get back together later. "… ultimately the earnings will decide the fate of a stock" (164).
"A quick way to tell if a stock is overpriced is to compare the price line to the earnings line. If you bought familiar growth companies - such as Shoney's, The Limited, or Marriott - when the stock price fell well below the earnings line, and sold them when the stock price rose dramatically above it, the chances are you'd do pretty well. I'm not necessarily advocating this practice, but I can think of worse strategies" (165).
In Lynch's examples, the earnings line reflects the EPS (earnings per share). It is on a different scale than the price line, of course (since the two are separated by a large factor, depending what the P/E ratio is). In Lynch's charts, the two graphs are overlayed on top of each other to provide a good visual indicator of how the two are usually moving up and down together. When the stock price deviates from the earnings, it will either rise or drop relatively soon (1-2 years), and the two lines will once again match up pretty closely.
The P/E ratio, or price per share over earnings per share, can be thought of as the number of years it will take the company to earn back the amount of your initial investment, assuming earnings stay constant.
"In a few cases, the P/E ratio listed in the newspaper may be abnormally high, often because a company has written off some long-term losses against the current short-term earnings, thus "punishing" those earnings. If the P/E seems out of line, you can ask your broker to provide you with an explanation" (169).
Corporate earnings do not stay constant. The fact that some stocks have P/E ratios of 40 and others 3 means that investors are willing to take substantial gambles on the improved future earnings of certain companies, while they're skeptical about the future of others.
P/E's tend to be lowest for slow growers, highest for fast growers, and vacillating in-between for cyclicals.
"Some bargain hunters believe in buying any and all stocks with low P/E's, but that strategy makes no sense to me. We shouldn't compare apples to oranges. What's a bargain P/E for a Dow Chemical isn't necessarily the same as a bargain P/E for a Wal-Mart" (169).
"If you remember nothing else about P/E ratios, remember to avoid stocks with excessively high ones" (170). A company with a high P/E must have incredible earnings growth to justify the high stock price.
"The stock market as a whole has its own collective P/E ratio, which is a good indicator of whether the market at large is overvalued or undervalued. I know I've already advised you to ignore the market, but when you find that a few stocks are selling at inflated prices relative to earnings, it's likely that most stocks are selling at inflated prices relative to earnings. That's what happened before the big drop in 1973-74, and once again […] before the big drop of 1987" (172).
Interest rates can have a large effect of prevailing P/E ratios, since investors pay more for stocks when interest rates are low and bonds are less attractive. Interest rates aside, "the incredible optimism that develops in bull markets can drive P/E ratios to ridiculous levels" (172).
After you understand the company's current basic value, you have to consider future earnings. Earnings are supposed to grow, and every stock price carries with it a built-in growth assumption. If you can't predict future earnings, you can at least find out how a company plans to increase its earnings. There are 5 basic ways a company can increase earnings: reduce costs, raise prices, expand into new markets, sell more of its product in the old markets, or revitalize/close/dispose of a losing operation.

Chapter 11: The Two-Minute Drill

Main idea: next step is to learn as much as possible about "the story" - what the company is doing to grow, increase earnings, etc.; this research is crucial, since it can help tell whether the earnings will increase or not - Lynch provides 2 examples where he did the right research and where he missed something.
Additional notes:

"Before buying a stock, I like to be able to give a two-minute monologue that covers the reasons I'm interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path." (174). Great idea, since it ensures that you know why you're buying the stock.
Lynch lists several example monologues for each type of company (slow grower, stalwart, etc.). They can include considerations of P/E ratios, growth rate, competitors, niche ideas, cost cuts, dividend info, acquisitions, restructuring, current business conditions, hidden assets, etc.
Lynch gives two examples from his experience. The first is La Quinta (motel chain), where he did his research and asked the right questions. The company was very successful.

Found out about La Quinta by asking a vice president of United Inns about competitors. "Asking about the competition is one of my favorite techniques for finding promising new stocks. […] When an executive of one company admits he's impressed by another company, you bet that company is doing something right" (177).
Lynch asked about many things. Key questions:

How it was possible that La Quinta had the same quality rooms, but charged 30% less.
What was the niche that allowed La Quinta to succeed with so many other motel chains around.
The costs - including the debts from expensive projects of hotel construction.

La Quinta was already expanding - not getting ready to expand. This made it a great time to invest. "La Quinta was a great story, and not one of those would-be, could-be, might-be, soon-to-be-tales. If they aren't already doing it, then don't invest in it" (179).
The company was growing at 50% a year and the stock had P/E ratio of 10 - Lynch claims that this made it a great bargain.

The second example Lynch provides is Bildner's (sandwiches and hot food). The company went bankrupt. Even though everything looked good on paper, Lynch missed one big thing.]: "I didn't wait to see if this good idea from the neighborhood would actually succeed someplace else. […] If the prototype's in Texas, you're smart to hold off buying until the company shows it can make money in Illinois or in Maine. That's what I forgot to ask Bildner's: Does the idea work elsewhere? I should have worried about a shortage of skilled store managers, its limited financial resources, and its ability to survive those initial mistakes" (182).

Chapter 12: Getting the Facts

Main idea: how to actually get the information you need: use your broker, call the company, visit the headquarters, kick the tires (in other words, try the product/service), and read the reports (balance sheet).
Additional notes:

While it helps to be a large-scale professional investor when dealing with companies, "I can't imagine anything that's useful to know that the amateur investor can't find out" (183).
"What you can't get from the annual report you can get by asking your broker, by calling the company, by visiting the company, or by doing some grassroots research, also known as kicking the tires" (184).
Brokers can provide useful information. Here are some questions you'd want to ask about La Quinta, for example: "What's the recent growth in earnings? […] What is it about La Quinta that makes it a good buy now? Where is the market? Are the existing La Quintas making a profit? Where's the expansion coming from? What's the debt situation? How will they finance growth without selling lots of new shares and diluting the earnings? Are insiders buying? […] What percentage of the shares is owned by institutions? Also, how long has your firm's analyst been covering this stock?" (186).
Calling the investor relations office at the company is a good way to get answers. If you're not getting good treatment, pretend that you own 20,000 shares and are trying to decide whether to double your position (mention that your shares are held in "street name" - they can't trace these since they are lumped together by brokerage firms and stored in an undifferentiated mass). Ask intelligent questions (not "why is the stock going down?"). Earnings are often difficult to predict, but you can ask about the positives and negatives this year. Sometimes you also hear something unexpected - this can be very profitable in buying/selling stocks.
Visit the headquarters. Lynch tries to get a feel of the place - he like seeing places where money is not spent on decorating the office but rather on the business itself: "Rich earnings and a cheap headquarters is a great combination" (190). Annual meeting of shareholders is also a great place to develop useful contacts and get a feel for company executives. Sometimes you get a certain feeling about certain people. "I could never prove this scientifically, but if you can't imagine how a company representative could ever get that rich, chances are you're right" (191).
Kick the tires - stay at a La Quinta motel, try a Taco Bell burrito, etc. "I've continued to believe that wandering through stores and tasting things is a fundamental investment strategy. It's certainly no substitute for asking key questions, as the Bildner's case proves. But when you're developing a story, it's reassuring to be able to check out the practical end of it" (192).
Read the annual report. "There's a way to get something out of an annual report in a few minutes, which is all the time I spend with one" (194). Lynch recommends getting 3 things out of the annual report:

Whether cash exceeds long-term debt: add cash and cash items with marketable securities, then subtract long-term debt. This is the "net cash" position. If the value is positive, the company is socking away more and more cash - a sure sign of prosperity. Debt reduction throughout the years is another sign of prosperity. "When cash increases relative to debt, it's an improving balance sheet. When it's the other way around, it's a deteriorating balance sheet" (194). Lynch ignores short-term debt in his calculations, because he assumes that the company's other assets (inventories, etc.) are valuable enough to cover it.
Whether the company is buying back shares: check whether the number of outstanding shares has been decreasing over the past years (can find this in the 10-Year Financial Summary) - if yes, the company has been buying back shares, which is a good sign.
How much cash there is per share: divide the net cash position by the number of outstanding shares, and you will get the amount of cash per share. This becomes important in the next chapter.

Chapter 13: Some Famous Numbers

Main idea: this chapter describes some important numbers and concepts in a company's financial well-being: percent of sales, P/E, the cash position, debt, dividends, book value, cash flow, inventories, pension plans, growth rate, and the profit margin.
Additional notes:

Percent of sales: when you're interested in a company because of one particular product, it's important to ask what the product means to the company as a whole - what percent of the sales does it represent?
P/E ratio:

Useful refinement to the definition - P/E of any company that's fairly priced equals its growth rate (growth of earnings). If the P/E ratio is less than the growth rate, the company may be a bargain.
"In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative. We use this measure all the time in analyzing stocks for the mutual funds" (199).

Cash position: how much cash a company has can raise/lower its actual value. You can subtract the amount of total cash divided by number of outstanding shares from the price of each share - and this can represent the more accurate price of the stock. Sometimes it's not much ($5 cash when the stock is selling for $40), but Ford in 1988 had $16.30 per share in cash while costing $38 per share. "Nevertheless, it's always advisable to check the cash position (and the value of related businesses) as part of your research. […] As cash piles up in a company, speculation about what will become of it can tug at the stock price" (201).
Debt:

"A normal corporate balance sheet has two sides. On the left side are the assets (inventories, receivables, plant and equipment, etc.). The right side shows how the assets are financed. One quick way to determine the financial strength of the company is to compare the equity to the debt on the right side of the balance sheet" (201).
"A normal corporate balance sheet has 75% equity and 25% debt. […] An even stronger balance sheet might have 1% debt and 99% equity. A weak balance sheet, on the other hand, might have 90% debt and 20% equity" (202).
Debt factor is most important among turnarounds and troubled companies. Young companies with heavy debt are also always at risk.
There're 2 different kinds of debt - this matters during a crisis:

Bank debt (bad) - due on demand and often "on call", doesn't necessarily come from a bank, if the borrower can't pay back the money the creditors strip the company and there's nothing left for the shareholders.
Funded debt (good) - can't be called as long as the borrower continues to pay interest, usually this type of debt is in the form of corporate bonds with long maturities.

Dividends can affect the value of a company and its stock price:

"One strong argument in favor of companies that pay dividends is that companies that don't pay dividends have a sorry history of blowing the money on a string of stupid diworseifications" - "bladder theory of corporate finance, as pronounced by Hugh Liedtke of Pennzoil: The more cash that builds up in the treasury, the greater the pressure to piss it away" (205).
The presence of a dividend can keep the stock price from falling as far as it would if there were no dividend - this is why it's a good idea to keep some slow growers and stalwarts in a portfolio.
On the other hand, smaller companies that don't pay dividends can grow much faster because of it.
One thing to make sure if you're buying a stock for its dividend (for extra income, for example) is whether the company will be able to pay the dividend during recessions and bad times. Cyclicals are not always reliable in this respect, but a company with a 20-30 year record of regularly raising the dividend is your best bet.

Book value - the listed value of the company:

Often, however, the stated book value bears little relationship to the actual worth of the company.
It can be very difficult to estimate the real value - hard to tell what certain products will sell for. "There's an unwritten rule here: The closer you get to a finished product, the less predictable the resale value. You know how much cotton is worth, but who can be sure about an orange cotton shirt? You know what you can get for a bar of metal, but what is it worth as a floor lamp?" (208)
"Overvalued assets on the left side of the balance sheet are especially treacherous when there's a lot of debt on the right" (208). Consider a company with $400 million in assets and $300 million in debt, resulting with a positive book value of $100 million. You know the debt part is a real number. But if the $400 million in assets turn out to bring in only $200 million (during a bankruptcy sale, for example), then the actual book value is a negative $100 million.
However, the book value doesn't always overestimate the value of the company - in many cases it underestimates it. This is where the whole idea of hidden assets comes into play. Hidden assets can be hidden in many places, including:

Subsidiary business owned wholly or in part by the large parent company - sometimes the parent company is foreign - you can often buy this parent company for less than the value of the U.S. subsidiary plus pick up other attractive businesses and real estate as part of the deal. Even if the subsidiary business doesn’t go up much in price, the parent company can get large gains.
When one company owns shares of a separate company.
Tax breaks in turnaround companies - "Bethlehem Steel currently has $1 billion in operating-loss carryforwards, an extremely valuable asset if the company continues to recover. It means that the next $1 billion that Bethlehem earns in the U.S. will be tax-free" (213).

Cash flow and free cash flow:

"Cash flow is the amount of money a company takes in as a result of doing business" (213).
$20 stock may have a $2 per share annual cash flow - 10:1 ratio - which is standard.
Free cash flow is what's left over after normal capital spending. "It's the cash you’ve taken in that you don't have to spend" (214). Here are some additional notes about free cash flow from Schwab:

Free cash flow is what a company has left over at the end of the year - or quarter - after paying for all the salaries, bills, interest on debt, and taxes and after making capital expenditures to expand the business: cash flow from operations - capital expenditures = free cash flow.
The difference between the revenue received and the costs incurred would be the firm's net income or earnings. If the firm received immediate cash payment for its sales and immediately paid cash for its costs, its earnings and cash flow would be the same. But there are timing differences between business actions and cash movements.
In the short term, the degree to which earnings and free cash flow differ provides the analyst with critical information about the nature of a firm's operations. In companies that need to pay money to expand, the free cash flow is right away affected, but earnings are not - these expenses only show up in earnings via depreciation, making these growing retailers look much more profitable than they really are.
Beware of any firm with negative free cash flow, even if reported earnings are positive.
Beware of any firm whose reported earnings exceed the cash flow they are generating from operations.
Look for cash flow information in the Statement of Cash Flow.

"Dedicated asset buyers look for this situation: a mundane company going nowhere, a lot of free cash flow, and owners who aren't trying to build up the business" (215).

Inventories can help shed light on a company's well-being. "With a manufacturer or a retailer, an inventory buildup is usually a bad sign. When inventories grow faster than sales, it's a red flag" (215). "On the bright side, if a company has been depressed and the inventories are beginning to be depleted, it's the first evidence that things have turned around" (216). It's hard for amateurs to make sense of inventories, but professionals with an edge can use them to an advantage.
Pension plans should be investigated - the company has an obligation to pay them even if it goes bankrupt. Make sure the company doesn't have an overwhelming pension obligation it can't meet. The pension situation is laid out in the annual report.
Growth rate:

Don't confuse "growth" and "expansion." A business can be growing but not expanding. "That's the only growth rate that really counts: earnings" (217).
A good investment is in a business that can raise prices without losing customers (cigarettes).
"All else being equal, a 20% grower selling at 20 times earnings (a P/E of 20) is a much better buy than a 10% grower selling at 10 times earnings (a P/E of 10)" (218). Higher growth rate allows for much better compounding, so even if it costs more, the return over a number of years will be greater.

Profit before taxes is known as the pretax profit margin (earnings/sales*100). Retailers have lower profit margins - Albertson's earns only 3.6% pretax. Profitable drug manufacturers have higher profit margins - Merck routinely makes 25% pretax or better. Therefore, the profit margin is really only useful in comparing companies within the same industry. "What you want, then, is a relatively high profit-margin in a long-term stock that you plan to hold through good times and bad, and a relatively low profit-margin in a successful turnaround" (221). With a low profit margin, profits increases can have a much larger impact (but can go into negative if business does down). Consider 2 companies:

Company A: $100 in sales, $88 in costs, $12 pretax profit. Business improves, prices go up 10%, costs go up 5% - $110 in sales - $92.40 in costs = $17.60 in pretax profit. Almost 50% increase in profit.
Company B: $100 in sales, $98 in costs, $2 pretax profit. Business improves, prices go up 10%, costs go up 5% - $110 in sales - $102.90 in costs = $7.10 in pretax profit. More than 250% profit increase!

Chapter 14: Rechecking the Story

Main idea: it's crucial to recheck the company story every few months, as it can change drastically - especially with fast growers, you need to ask: what will keep them growing?
Additional notes:

There are 3 phases to the growth company's life: the start-up phase (during which it works out the kinks in the basic business), the rapid expansion phase (during which it moves into new markets), and the mature/saturation phase (where it begins to prepare for the fact that there's no way to continue to expand).
While checking the stock, you need to determine whether the company seems to be moving from one phase to another. The second phase is when most money can be made. When the company begins to move into the third phase, you need to find out what the company will do to continue growing and whether it has a realistic chance to succeed. If not, sell it.
For example, McDonald's - it expanded into every town, every corner. Investors began worrying in the late 1970's that it has no way to grow - the P/E fell from 30 of a fast grower to 12 of a stalwart. McDonand's, however, was able to maintain its growth in imaginative ways: drive-in windows, breakfast menu, salads and chicken, expanding in foreign countries. Other companies have not fared so well.
Again, you need to check on the company every quarter - update the story, make sure the company has way to grow its earnings, whether it's via expansion or innovative ways to increase sales and cut costs.

Chapter 15: The Final Checklist

Main idea: this chapter summarizes stock advice for each of the six major company categories.
Additional notes:

For all stocks in general, check:

The P/E ratio to compare it to similar companies in the same industry.
Whether insiders are buying and whether the company is buying back its own shares.
The record of earnings growth to date and whether these earnings are sporadic or consistent.
The debt-to-equity ratio - whether the balance sheet is strong or weak.
The cash position. "With $16 in net cash, I know Ford is unlikely to drop below $16 a share" (228).

Slow growers: check out all the info on dividends.
Stalwarts: make sure you're not paying too much (P/E ratio) and avoid diworseifications.
Cyclicals: keep a close watch on inventories and the supply/demand relationship and anticipate a shrinking P/E toward the end of the cycle (peak earnings); upturns in are much easier to predict than downturns.
Fast Growers:

Investigate whether the product that's supposed to make money is a major part of the business.
Examine the growth rate in earnings in recent years. Beware of companies that grow faster than 25% they can usually be found in hot industries, which is dangerous.
Make sure the company has duplicated its successes to prove that expansion will work.
Find out if the company has room to grow.

Turnarounds:

"Most importantly, can the company survive a raid by its creditors? How much cash does the company have? How much debt?" (230).
What is the debt structure? If the company raises new capital by issuing new shares, the result can be disappointing - even if the company turns around, the stock may not (too diluted).
Find out all the details on how the company is supposed to turn around - cutting costs, restructuring.
Watch for big write-offs - earnings for Lockheed went from $1.50 per share to $10.78 per share in two years - they wrote off a large amount ($26 per share), but it was a one-time loss, immediately followed by strong earnings with no more losses to deal with.

Asset Plays: figure out the value of the assets (watch for hidden assets), offset by the amount of debt.

Section Summary - key points

Understand the nature of the companies you own and the specific reasons for holding the stock.
Consider the type and size of the company so you have a better idea what to expect.
Look for small companies that are already profitable and have proven that their concept can be replicated.
Avoid hot stocks in hot industries.
Distrust diversifications, since they can easily turn into diworseifications.
It's better to miss the first move in a stock and wait to see if a company's plans are working out. When in doubt, tune in later.
Invest in simple companies that appear dull and out of favor with Wall Street - no institutional ownership and no analysts to drive up the stock price.
Moderately fast growers (20-25%) in nongrowth industries are ideal investments.
Look for companies with niches.
When purchasing depressed stocks in troubled companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt (and things like pension plan obligations).
A lot of money can be made when a troubled company turns around.
Carefully consider the P/E ratio. If the stock is grossly overpriced, even if everything else goes right, you won't make any money.
Find a story line to follow as a way of monitoring a company's progress.
Look for companies that consistently buy back their own shares.
Insider buying is a positive sign, especially when several individuals are buying at once.
Beware of stated book value - it's real value that counts.

Part 3: The Long-Term View

"In this section I add my two cents to important matters such as how to design a portfolio to maximize gain and minimize risk; when to buy and when to sell; what to do when the market collapses; some silly and dangerous misconceptions about why stocks go up and down; the pitfalls of gambling on options, futures, and the shorting of stocks; and finally what's new, old, exciting, and perturbing about companies and the stock market today" (235).

Chapter 16: Designing a Portfolio

Main idea: own as many stocks as there are situations in which you've got an edge and you've found a prospect that pass all the tests of research; there are some good benefits to owning more than 1-2 stocks in a small portfolio; spread your money among several categories of stock to minimize risks; don't get out of the market foolishly but rather rotate your money correctly.
Additional notes:

"Nine to ten percent a year is the generic long-term return for stocks, the historic market average. You can get ten percent, over time, by investing in a no-load mutual fund that buys all 500 stocks in the S&P 500 Index, thus duplicating the average automatically" (238). You're hence looking to beat 10% with active investing - whether on your own or through some sort of managed fund.
Two factions of investment advisors - Gerald Loeb: "Put all your eggs in one basket", Andrew Tobias: "Don't put all your eggs in one basket. It may have a hole in it." You can't always foresee how good your basket(s) will be, so don't rely on a fixed number of stocks but rather investigate each one thoroughly.
"There's no use diversifying into unknown companies just for the sake of diversity" (240).
"In small portfolios I'd be comfortable owning between 3 and 10 stocks" (240). Several benefits:

The more stocks you own, the more likely it is that one of them will become a tenbagger.
The more stocks you own, the more flexibility you have to rotate funds between them. Lynch describes how he holds most of his money in a small number of stocks, with 1% of the money spread out among 500 secondary opportunities that he monitors periodically.

Another way to minimize risk is to spread your money among several categories of stock. For example, you may want to throw a couple stalwarts in to offset the risk of owning multiple fast growers and turnarounds.
"I don't go into cash […]. Going into cash would be getting out of the market. My idea is to stay in the market forever, and to rotate stocks depending on the fundamental situations. I think if you decide that a certain amount you've invested in the stock market will always be invested in the stock market, you'll save yourself a lot of mistimed moves and general agony" (242).
Some people sell the winners (stocks that go up) and hold on to the losers (stocks that go down) - "which is about as sensible as pulling out the flowers and watering the weeds" (243). This strategy is tied to the current movement of the stock price as an indicator of the company's fundamental value - not smart.
Lynch's strategy is "to rotate in and out of stocks depending on what has happened to the price as it relates to the story" (243):

With stalwarts - if the price has gone up 40% and nothing wonderful is on the horizon, it may be a good idea to sell the stock and replace it with another stalwart that's attractive but hasn't gone up yet. "By successfully rotating in and out of several stalwarts for modest gains, you can get the same result as you would with a single big winner" (243).
"The fastest growers I keep as long as the earnings are growing and the expansion is continuing, and no impediments have come up. Every few months I check the story just as if I were hearing it for the first time" (243). For fast growers, cyclicals, and turnarounds - get out of situations where the fundamentals are worse and the price has increased and into situations in which the fundamentals are better and the price is down.

"To me, a price drop is an opportunity to load up on bargains from among your worst performers and your laggards that show promise. If you can't convince yourself 'When I'm down 25%, I'm a buyer,' and banish forever the fatal thought 'When I'm down 25%, I'm a seller;' then you'll never make a decent profit in stocks" (244).
Do not rely on stops as protection on the downside nor on artificial objectives on the upside ("sell when it's a double"). This just doesn't work long-term. As long as the fundamentals and the story continue to make sense or get better, keep the stock.

Chapter 17: The Best Time to Buy and Sell

Main idea: buy at the end of the year and during collapses; there are many false signs, tips, and gut feelings that advise to sell - don't sell unless you've done your homework (depending on which type of stock you own).
Additional notes:

Lynch believes in buying whenever you've convinced yourself that you've found solid merchandise at a good price. However, there are particular periods when you can find good bargains:

End-of-the-year tax selling period between October and December. Institutional sellers sell to clean up portfolios for evaluations, and individuals sells to get tax breaks. All the selling can drive stock prices down to of perfectly good companies to crazy levels.
During the "collapses, drops, burps, hiccups, and freefalls that occur in the stock market every few years. […] Professionals are often too busy or too constrained to act quickly in market breaks" (246), but you can. Get over your fear (when your gut is telling you to sell) and buy. The stock prices may fall even though the companies are healthy and profitable.

There are a lot of "signs" to sell - do not listen to them. They can be tips from your friends, from stock brokers, from other professionals. They might have no idea what they are talking about! Don't sell if you see an insider selling. Don't listen to the "sure signs that the market is going to sink," unless you know exactly what the effects of certain events may be.
"Over the years I've learned to think about when to sell the same way I think about when to buy. I pay no attention to external economic conditions, except in the few obvious instances when I'm sure that a specific business will be affected in a specific way. […] But in nine cases out of ten, I sell if company 380 has a better story than company 212, and especially if the latter story begins to sound unlikely" (251).
There are some general signs for each type of company that may hint at when to sell:

Slow Growers:

"I sell when there's been a 30-50% appreciation or when the fundamentals have deteriorated, even if the stock has declined in price" (252).
The company has lost market share for 2 consecutive years and is hiring another advertiser.
No new products are being developed - the company seems dormant.
The company is looking for new acquisitions - debt begins to pile up.

Stalwarts:

"If the stock price gets above the earnings line, or if the P/E strays too far beyond the normal range, you might think about selling it and waiting to buy it back at a lower price - or buying something else, as I do" (252).
The stock has a higher P/E than that of other similar-quality companies in the industry. Lynch provides and example of 15 as opposed to 11-12.
A major division that contributes 25% of earnings is vulnerable to an economic slump that's taking place (housing starts, oil drilling, etc.).
Growth is slowing down, and even though costs are being cut, cost-cutting is limited.

Cyclicals:

"The best time to sell is toward the end of the cycle," but no one know when that is (253).
Cyclicals are very tricky - the stock can start going down even if nothing is happening if a lot of people decide it's time to start selling.
Sure signs - inventories building up, falling commodity prices (not yet reflected in earnings), emerging competition, building new plants instead of modernizing old plants (lower costs).

Fast Growers:

"Here, the trick is not to lose the potential tenbagger. […] The main thing to watch for is the end of the second phase of rapid growth, as explained earlier" (254).
Sell if you see the characteristic of the "stock you'd avoid" (Chapter 9).
A growth company's P/E may get absurdly large - this is a good indicator of when to sell. If the stock P/E is at 30, while the projects of earnings growth are 15-20% for the next 2 years, sell.
If you see top executives or other key employees leave, this is a bad sign.

Turnarounds:

"The best time to sell a turnaround is after it's turned around" (255). You can't wait too long, because then the company needs to be reclassified into a different type of stock.
When debt rises after declining steadily, when the P/E is inflated relative to earnings prospects - at this point, chances are the company has turned around, and it's time to sell, unless you believe it has future potential as a cyclical, asset play, stalwart, etc.

Asset Plays:

"Lately, the best idea is to wait for the raider. […] These days, the enhancement of shareholder values happens much quicker, thanks to the packs of well-heeded magnates roving around looking for every last example of an undervalued asset" (256). This makes it easy for individual investors to know when to sell.
After the big guys notice the hidden assets, there can be a takeover, a bidding war, or a leveraged buyout - which can send the stock price soaring.
A key sign to sell is when institutional ownership has risen from 25% five years ago to 60% today - with large fund groups being major purchasers.

Chapter 18: The Twelve Silliest (and Most Dangerous) Things People Say About Stock Prices

Main idea: twelve dangerous misconceptions about stocks and the market.
Additional notes:

1: If it's gone down this much already, it can't go much lower.
2: You can always tell when a stock's hit bottom:

"You aren't going to be able to pick the bottom on the price. What usually happens is that a stock sort of vibrates itself out before it starts up again" (260). That can take 2-3 years.

3: If it's gone this high already, how can it possibly go higher?

"There's no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven't changes, 'can't go much higher' is a terrible reason to snub a stock" (261).

4: It's only $3 a share: what can I lose?

"If you'd invested $1000 in a $43 stock or a $3 stock and each fell to zero, you'd have lost the same amount. No matter when you buy in, the ultimate downside of picking the wrong step is always the identical 100%" (263).

5: Eventually they always come back.
6: It's always darkest before the dawn:

"Sometimes it's always darkest before the dawn, but then again, other times it's always darkest before pitch black" (265).

7: When it rebounds to $10, I'll sell:

Don't make absolute goals like that - you might miss it by a tiny bit and lose everything.
"Whenever I'm tempted to fall for this one, I remind myself that unless I'm confident enough in the company to buy more shares, I ought to be selling immediately" (265).

8: What me worry? Conservative stocks don't fluctuate much:

"Companies are dynamic, and prospect change. There simply isn't a stock you can own that you can afford to ignore" (265).

9: It's taking too long for anything to ever happen:

"If all's right with the company, and whatever attracted me in the first place hasn't changed, then I'm confident that sooner or later my patience will be rewarded" (266).
Furthermore - several years of "going nowhere" can be a strong hint of the next major move up.

10: Look at all the money I've lost: I didn't buy it!

"The worst part about this kind of thinking is that it leads people to try to play catch up by buying stocks they shouldn't buy, if only to protect themselves from losing more than they've already 'lost.' This usually results in real losses " (268).

11: I missed that one, I'll catch the next one:

Remember - "the next Wal-Mart" if very unlikely. Don't buy companies hailed as the "next something."
"In most cases it's better to buy the original good company at a high price than it is to jump on the 'next one' at a bargain price" (268).

12: The stock's gone up, so I must be right or… the stock's gone down so I must be wrong:

"If I had to choose a great single fallacy of investing, it's believing that when a stock's price goes up, then you've made a good investment" (269).
Short-term fluctuations mean nothing. "A stock's going up or down after you buy it only tells you that there was somebody who was willing to pay more - or less - for the identical merchandise" (269).

Chapter 19: Options, Futures, and Shorts

Main idea: Lynch is strongly against options, futures, and shorts - due to it being unconstructive speculation that has potentially infinite risks (for options - only the in short position, of course).
Additional notes:

Lynch claims that he doesn't understand futures and options very well himself, especially risk-reducing strategies involving hedges, combinations, and straddles. His advice should be taken with a grain of salt.
Options are a zero-sum game - "for every dollar that's won in the market there's a dollar that's lost" (272).
"In the multibillion-dollar futures and options market, not a bit of the money is put to any constructive use" (272) - meaning that money for stocks/bonds is at least used by companies to expand operations, whereas money in the futures and options markets are just bets - and transfers of money from one place to another.
"Warren Buffet thinks that stock futures and options ought to be outlawed, and I agree with him" (273).
Selling options and dealing in futures can have huge risks. Buying options has much more controllable risk.
Shorting is slightly "better", because you are not paying for time as you are with futures/options (since those contracts have expiration dates). However, shorting can be very dangerous:

Even if you are right about the lousy state of a company, other investors might not realize it just yet and send the stock price higher.
The risk is potentially infinite, since a stock price has no ceiling. If you short something, and the stock price just keeps on growing, you will be in a very bad position. You're also required to maintain a sufficient balance in your brokerage account to cover the value of the shorted stock (this may be different now - you may need to enough to cover a certain percentage).

Chapter 20: 50,000 Frenchmen Can Be Wrong

Main idea: a basic wrap-up of the book - Lynch talks about the various events that affected the stock market historically, and how you need to remain optimistic if you are willing to invest long-term.
Additional notes:

The day of the OPEC's oil embargo (October 19, 1973), the market rose 4 points and continued climbing the next five sessions - before crashing hard. "This demonstrates that the market, like individual stocks, can move in the opposite direction of the fundamentals over the short term" (277).
The Japanese market from 1966 to 1988 has taken the Nikkei Dow up 17x - out Dow Jones only went up 2x.
The emergence of merger and acquisition groups, and other buyout groups, that are willing and able to finance $20-billion purchases demonstrate that any company, large or small, is up for grabs. These "rob" the shareholders - even though the shareholders might get a seemingly great deal during the buyout ($20 per share of stock that costs $10), the potential success of the company may be huge ($100 per share rise) - and this will go directly into the pocket of the private entrepreneur. "More than a few potential tenbaggers have been taken out of play by recent mergers and acquisitions" (284).
LBO - leveraged buyout - is when entire companies or divisions are "taken private" - purchases by outsiders or by current management with money borrowed from banks or via junk bonds.
Masco was the greatest stock in 40 years - the company developed the one-handed faucet, and the stock went up 1000-fold.
With all the huge professional funds around, can the individual investor really survive? "Small investors are capable of handling all sorts of markets, as long as they own good merchandise" (280). Professional investors are often right, but only on the last 20% of a typical stock move - the idea is to get a quick sure gain and get out. "Small investors don't have to fight this mob. They can calmly walk in the entrance when there's a crowd at the exit, and walk out the exit when there's a crowd at the entrance" (281).
Stock prices always seem to drop on Mondays. Lynch provides his own theory why. "Unless you're careful to sleep late and ignore the general business news, so many fears and suspicions can build up on weekends that by Monday morning you're ready to sell all your stocks. That, it seems to me, is the principal cause of the Monday effect" (282). Stocks recover throughout the rest of the week.

Section Summary - key points

Sometime in the next month, year, or three years, the market will decline sharply.
Market declines are great opportunities to buy stocks in companies you like. Corrections - Wall Street's definition of going down a lot - push outstanding companies to bargain prices.
The biggest winners are surprises to me, and takeovers are even more surprising. It takes years to produce results.
Stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will prevail.
Don't judge a company's financial well-being by the behavior of its stock price.
Stalwarts with heavy institutional ownership and lots of Wall Street coverage that have outperformed the market and are overpriced are due for a rest or a decline.
Don't buy a company with mediocre prospects even if the stock is cheap.
Don't sell an outstanding fast grower just because its stock seems slightly overpriced.
By careful pruning and rotation based on fundamentals, you can improve your results. When stocks are out of line with reality and better alternatives exist, sell them and switch into something else.
When favorable cards turn up, add to your bet, and vice versa.
If you don't think you can beat the market, then buy a mutual fund and save yourself a lot of extra work and money.
Always be invested, even during stagnant markets (and remember - during corrections is the best time to find bargains!) - so as to be "caught with your pants up" when the market is going up.

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